Issue Bulletin #176
July 29, 1992
July 29, 1992
MW GRAMG FTM ON )FJUL LAMS SHOUD NOT BE RALSM
Congress currently is considering legislation which would increase the fees charged by the federal government to the 31,000 Western ranchers who graze sheep and cattle on 3 18 million acres of federally owned land. A proposed 33.3 percent hike in the fees is contained in the appropriation bill for the Department of the Interior (H.R. 5503), which passed the House of Representatives on July 22, and in the authorization bill for the Bureau of Land Management (ILR. 1096), which passed the House last summer. Action on both bills is expected soon in the Senate. According to a recent report by the Secretaries of Agriculture and the Interior. the federal government spent $52.3 90on more on rangeland administration in 1990 than it received in gazing fees. prompting the claim that ranchers who graze their sheep or cattle on federal land are receiving a subsidy. Ile wide disPar- ity between grazing fees on federal and private rangeland also gives plausibility to the notion that ranchers receive a subsidy. Ile proposed fee increases are in- tended to eliminate this supposed subsidy. Ile average grazing fee on private land in 1991 was estimated by one researcher to be $9.19 per Animal Unit Month or AUK An Animal Unit Month represents the amount of forage that normally would be consumed over a one-month period by one cow and her calf, or five sheep, or one horse. 1!he fee on federal land currently is only $1.92 per AUM. Ile argument for a fee hike is appealing on its surface, but closer scrutiny re- veals serious fiaws. For instance: PMere is a good reason why the price charged for Vrazing on public land typically is lower than for private land. Private land generally is of better quality and the owners provide ranchers with fences,
1 Depamnent of Agricultue, U.S. Rnst Savior, aid Dwment of the Intom. Bweau of Imid hdangment. Grazing Fee Renew and Evaluation: Update of the 1986 Final Report. (April 30. IM), p. 7. Fig= 1.5. Data cited we based an the best available data from die most recent year available.
roads, water, and protection for livestock. Ranchers must provide these services for themselves on public land. # The federal government does not, in fact, own the valuable water rights on its Western lands. These rights already belong to the ranchers. Private landowners leasing out their rangeland, on the other hand, own the rights on their own lands. Thus it should be ex- pected that ranchers using public land should pay a lower fee than they would pay for access toprivate-land-otherwise ranchers would be charged for rights they already own on public land. * The federal government retains tide to public land@ but it may not actually own the grazing rights. The law is unclear as to whether Uncle Sam or the ranchers own the rights. Ranchers used these lands for decades before the government began charging fees, but the federal government never explicitly recognized an owner- ship right to graze these lands. The government has, however, recog- nized property rights of some kind with respect to grazing. In fact, the Internal Revenue Service treats a rancher's grazing rights as pri- vate property for estate tax purposes. # If the hes were raised by the amount being considered by Congress, fewer ranchers would make use of public grazing lands. In all probability, Washington would end up collecting less revenue rather than more.
* The controlled grazing that now occurs helps to protect the ecology of the West, and so reduces the costs taxpayers other- wise would pay to protect the environment. For instance, cattle aid decomposition of vegetation by trampling the soil and even help spread seed and fertilizer. Also, foraging keeps grass short and so helps prevent prairie fires. In fact, without cattle, much of the fertile land would become deserL The dispute over grazing fees has its origin in government ownership of the land. If Congress were to sell the land to private owners, the government would obtain billions of dollars in proceeds and market-driven fees would accurately re- flect the value of grazing rights to ranchers. Short of this step, lawmakers should recognize the flimsiness of the argument that ranchers receive a subsidy and keep grazing fees at their current levels.
ORIGINS OF THE GRAZING FEE CONTROVERSY
The ranchers who homesteaded the Western rangelands acquired some parcels of land outright, but simultaneously they obtained the right to graze livestock on adjoining lands still owned by the federal government. Just as mining companies in some instances acquired the mineral rights underneath federal land, so these ranchers acquired the grazing rights. Moreover, under state property laws in the Western states, water was and still is considered owned by whoever first makes beneficial use of it. Since the ranchers used the water on the federal lands for their
cattle and sheep, and the federal government did not, the ranchers became the owners of the water rights. Fair Market Value. Ranchers initially were not charged for access to federal land, but grazing fees were instituted in 1906. Significantly, the charge first was called a tax rather than a fee, out of tacit recognition that the ranchers already had the right to graze their cattle on federal land. The purpose of the tax was to pay for the cost to the federal government of managing the lands to prevent overgrazing. The Taylor
2 FrederickW. Obermiller, "IMe June 20,1991, Synar Amendment to the House Interior Appropriations Bill Effects on Fee Receipts and Grazing Use of Public Lands-A Preliminary Assessment@ June 23, 1991, p. 4.3
Raising fees would seem on its face to solve two problems at once. The action would eliminate what appears to be a subsidy to ranchers, and a fee hike would re- duce the supposed environmental harm caused by grazing. But the issue turns out to be much more complex. In fact, large increases in grazing fees actually could exacerbate the problems they are meant to solve.
WHY FEDERAL LAND IS WORTH LESS
In determining whether the government charges the fair market value for graz- ing on federal lands, a 1986 report by the Forest Service and the BLM and a 1992 update conducted by the same agencies make two crucial errors.3 First, the report and update use faulty statistical methods to arrive at the conclusion that fees are too low. Cy Jamison, Director of BLM, has acknowledged these statistical meth- odology problems, admitting that "fflrom where we took off to do the  study, it never resolved issues of how the methodology [used originally in the 1986 report] was developed to set the fee. We need to go back and look at the whole picture." Second, the report and the update assume that the value of foraging on federal land is equivalent to foraging on privately leased land. It is not. The right to graze on private land is far more valuable than the same right on federal land, because there are a variety of important differences between federal and private land.
Poorer Quality. For one thing, federal rangelands generally are of poorer quality, more remote, and more difficult to manage and control than private lands. Homesteaders had their choice of land, so naturally they took the best lands for themselves. Only the least valuable parcels remained federally owned.
Fewer Services. For another thing, private lessors provide a number of important and valuable services that the federal government does not provide. A rancher who leases federal rangeland, for instance, usually must, among other things, build his own roads, erect and repair his own fences, and furnish his own water tanks and reservoirs. A rancher who leases private rangeland has all these services provided for him.
Shared Access. Another important difference is that a rancher who leases federal rangeland must share the land with the general public. Campers and hunters often leave gates open, requiring the rancher to retrieve strays and leading to loss of some to predators. Further, hunters sometimes shoot cattle by accident. On private lands, the lessor not only will prevent public access, thereby decreasing the frequency of animal loss, but normally is obliged to round up any strays that do wander. And in some instances the lessor even will insure3 Department of Agriculture, U.S. Forest So-vice, and Department of the Interior, Bureau of Land Management, Grazing Fee Review and Evaluadon (1986). For the 1992 update, see footnote 1, above.
the lessee against this loss as a part of his fee. The federal government never does this.
Because the operating costs of ranching on public lands are much higher than on private lands, the rights to graze public lands are worth less. In order to make a fair comparison, therefore, one would need to adjust the average grazing fee on private land by subtracting the value of all the services that a private landlord pro- vides, differences in fence and road maintenance costs, the value of private water rights, and the -value of-the right to exclude the general -public, as well as the dif- ferences in the underlying quality of the land. Oregon State University's Ober- miller has estimated the appropriate fee differential between federal and private rangelands. By his calculations, if private land were provided under the same terms and conditions that currently'apply to federal land, then even the best pri- vate land would be worth only $4.51 per AUM. 4 This represents the highest fair market value that any parcel of rangeland could have, and it would have to be a premium-quality parcel. The overwhelming major- ity of public parcels are of lesser quality, more remote, and more difficult to man- age. 11us, their 4 market value is much lower-$2.09 per AUM or less, accord- ing to Obermiller. Indeed, for a substantial portion of the federal government's rangeland, even the current fee of $1.92 per AUM is too high. According to the Forest Service, approximately 20 percent of the grazing allotments currently avail- able go unused.
THE EXISTENCE OF PRIOR PRIVATE GRAZING RIGHTS
Another important dffference between federal and private rangelands calls into question whether the federal government should charge any fee at all. Many Americans tend to think that owning a parcel of land implies the rights to build, farm, or use the land's resources, such as grass, timber, water, or minerals. But different individuals actually can own partial rights to the same piece of land. This is the case with federal rangeland. The land does not belong wholly to the federal government. Ranchers who graze their sheep or cattle on federal rangelands al- ready own a variety of important and valuable property rights to the land. In most instances, ranchers began to use lands adjacent to their homesteads and the water on it to graze their livestock decades before the federal government started charging a grazing tax or fee. Indeed, the federal government implicitly recognized these pre-existing grazing and water "rights." Recognizing Rights. When it first started charging a fee and regulating the number of cattle or sheep that could graze on the open range, for instance, it as- signed the grazing allotments on the basis of these pre-existing rights. Further, the government in numerous other ways recognizes that some form of rancher owner-
4 FrederickW. Obermiller, "The Treasury and Lmd Use Implications of Increases in Grazing Fees on the Western Public Rangelands as Proposed Under H.R. 5503," July 13, 1992, p. 6. 5 Zbid.5
ship exists. The Internal Revenue Service levies an estate tax on the ranchers' ownership interests in federal lands. Also, the military is required by law to com- pensate ranchers whenever it appropriates the federal land. In addition, range rights can be purchased only from the rancher who owns them, not from the fed- eral government. 16 FinaRy,therancherswhosesheepandcattlegmzeonfederaI land have constructed, mostly at their own expense, hundreds of millions of dol- lars worth of fences, wells, reservoirs, and other improvements that are not re- quired when they lease private rangeland. When Congress passed the Taylor Graz- ing Act in 1934, it explicitly recognized that ranchers owned these improvements. In fact, the Act required subsequent purchasers of the grazing permits to reim- burse the previous owner for the value of those improvements. One can argue, as many Western ranchers do, that pre-existing grazing rights al- ready fully entitle them to graze their cattle and sheep on federal land. According to this view, any fee at all represents an attempt by the federal government to make the ranchers pay for property rights they already own. Moreover, even if a modest grazing fee can be justified as a user charge for land management services that the federal government provides, the government should take account of the ranchers' water rights and improvements in setting the level of the fee. The ranch- ers cannot fairly be charged for what is already theirs. Indeed, the government risks expensive litigation if it raises fees significantly, on the basis that it has "taken" the ranchers' property and thus owes them compensation.
1HGHER FEES COULD MEAN LESS REVENUE
Advocates of higher grazing fees want the federal government to take in more revenue so that it can cover My the costs it incurs in managing federal range lands for ranchers. Their argument assumes that the federal government is not breaking even already. However, this is far from clear. The $52 million shortfall cited in the Forest Service-BLM update contains many costs not related to admin- istering the grazing program. This alleged shortfall includes management costs that are attributable to recreational and other non-grazing uses of rangelands. Ex- cluding these other costs from the calculation, it turns out that the average cost of grazing program management alone is only $1.47 per AUM for BLM land and $1.78 for the Forest Service land, according to Professor Obermiller. !7Sinebe federal grazing fee in 1990 was $1.91 per AUM, the government has been mak- ing a slight profit on its grazing programs, not a loss. By comparison, the federal government recovers only one percent of its recreational management costs though user fees for visitors. ! 86 Wayne Hage, Storm Over Rangelands (2nd ed.) (Bellevue, WA: Free Enterprise Press, 1990). 7 FrederickW. Obermiller, "In Search of Reason. The Federal Grazing (Fee) Debate," testimony presented to the Subcommittee on Public Lands, National Parks, and Forests, Committee on Energy and Natural Resources, 102nd Congress, 2nd Session, July 1. 1992, p. 44. 8 M. Clawson, The Federal Lands Revisited (Baltimore, Maryland: Johns Hopidns University Press, 1983), P. 100.
Notwithstanding any calculation of appropriate management costs, higher graz- ing fees probably would result in a net loss of funds to the federal government. While the government would collect more money from any grazing allotments that continue to be used, a higher fee would mean that more allotments would fall into disuse. Some 20 percent of the current available allotments, or some four to five million AUMs, already go unused because, for many parcels, the current fee of $1.92 per AUM already is too high. Studies by Professor Obermiller indicate that the number of allotrnents used would fall sharply under the grazing fee for- mula proposed in the legislation now before Congress, fr?m the current level of about 18 million AUMs to only about 9 million by 1996. Since the formula pro- posed in H.R. 5503 eventually could raise the fee for grazing on federal land above the fair market value of even the best parcels, the number of allotments used conceivably could drop to zero sometime after 1996. How Costs Would Increase
The argument for raising fees implicitly assumes that the goverrunent's cost of administering its lands would be reduced with less grazing. In fact, most of the costs of monitoring and managing federal rangelands would be incurred whatever the level of grazing because most of the government's administration costs are fixed. Further, the government no longer would enjoy the many benefits it now re- ceives from private ranchers, such as building and maintenance of roads and fences, the creation of watering holes, the clearing of brush, and control of ero- sion and predators. BLM Director Cy Jamison predicts that if ranchers were re- moved from federal land, the cost to the government of managing the range actu- ally would increase by as much as 50 percent. The increased outlays for the federal government due to higher grazing fees probably would be much greater than this estimate of increased outlays. For one thing, if ranchers are priced off federal rangelands, the government would have to build hundreds of thousands of miles of fences to keep cattle from trespassing onto federal land. In the Eastern states, a cattle owner is responsible for putting a fence around his land to keep his cattle in, and is liable to his neighbors if his cat- de escape and trespass onto the neighbors' land. However, in most Western states, a landowner who fails to put a fence around his own land may not recover for trespass if other people's cattle come onto his land because the landowner is legally responsible for fencing the cattle out. Billions for Fences. No one knows precisely how many miles of fencing the federal government would have to build. Because federal land in most Western states is interspersed with private land in a checkerboard pattern, however, the amount of fencing required would be enormous. In one grazing district in Wyo- ming alone, the BLM estimates that it will have to put up 13,222 miles of fencing at a cost of almost $98 million if cattle grazing is discontinued because of exces- sive fees. The total cost to the federal government of fencing cattle off all its West- ern rangelands could be several billion dollars. 10
9 Obermiller, testimony of July 13, 1992, op. cit., p. 7.7
The federal government also would have to pay additional billions of dollars to survey its land and determine its property boundaries. This was never completed in the past because there was no need to determine the precise boundaries be- tween the federal lands and the adjoining private lands whose owners were using the federal lands. Since the cost of fencing and surveying would, in many in- stances, exceed the value of the land itself, the government might have to let ranchers graze their cattle for free. If the federal government were to attempt to force the costs of fencing or surveyir!g onto adjacent private landowners, it would face substantial litigation costs. Reduced Revenues. Above a certain level, a higher fee will produce less graz- ing fee revenue than a lower one. Professor Obermiller's calculations suggest that, ignoring increased outlays and reduced income tax receipts, gross grazing fee revenue alone would be maximized at a fee of around $3.30 per AUM. But this would bring in only about $15 million in additional federal revenue because of the sharp reduction in the number of AUMs that would continue to be used, considerably less than the $25 million anticipated by proponents of higher fees. Under the formula proposed in H.R. 5503, grazing fees would rise above their gross revenue-maximizing level of $3.30 per AUM by 1994, and so the federal government would experience a reduction in grazing fee revenue when higher fees took effect in subsequent years. I IMoreover, Obermiller's figure of $3.30 per AUM does not take into account either the increased costs that higher fees would entail or the loss in federal income tax revenues that would accompany a contrac- tion in the cattle industry. Overall, even at Obermiller's gross revenue-maximiz- ing level, net revenue probably still would decline. This would occur both be- cause of higher costs and because a higher fee would reduce federal income tax collections by more than the increase in grazing fee revenue. Because federal land in most Western states is interspersed with private land in a checkerboard pattern, most private ranchers have to use some federal land in order to raise their cattle. The private acreage alone cannot support enough head of cattle year-round to make most ranch operations profitable. Moreover, most ranchers paid a price for their land and have mortgage loans that reflect the cur- rent grazing fees. A fee increase immediately would reduce the value of their ranches as collateral, making it difficult or impossible for many to get operating capital. Thus, many ranchers-whose average annual income is only $28,000 even under the current fees-would be driven out of business. This would mean significant economic harm to the Western states and a reduction in U.S. beef, lamb, and wool production.10 SeeWaffen Brookes, "Can DeinocratsTake Back theWest?" The Washington Tinws, September 17,1991, p. R. 11 Obermifler, testimony of July 13, 1992, op. cit., p. 7.
HARM TO THE ENVIRONMENT
Some advocates of higher grazing fees acknowledge that a fee hike would re- duce grazing but maintain that less grazing would be good for the environment. But reduced grazing in reality would damage the West's ecology. The reason is that livestock grazing can be good for rangelands. Cattle and sheep accelerate de- composition of vegetation by trampling it, thereby recycling vital nutrients, and by-help-to spread seeds-and fertilizer. -Grazing also helps prevent fires, which can start and spread most easily in long, dry grass that has not been clipped by forag- ing. Brush-clearing by private ranchers whose cattle graze on federal land further reduces the danger of fire. Furthermore, livestock producers have built tens of thousands of watering sites on federal lands, thereby improving those lands and benefitting various species of wildlife. Since 1960, for example, elk and moose populations on federal land have increased by 782 percent and 476 percent, re- spectively. And controlled grazing along riverbanks helps prevent the grass from becoming overgrown and can promote the growth of young trees that, when older, provide shade and prevent erosion. By contrast, a lack of grazing can lead to the land rapidly turning to desert, a process known technically as desertification. Lands left untrampled by grazing an- imals develop a water-resistant crust that causes the soil to absorb less rain. In ad- dition, uneaten grasses remain standing after they are dead, locking up nutrients and blocking sunlight fiwn reaching live grass below. A striking example of the difference grazing can make is found in the Servilleta National Wildlife Refuge in New Mexico. Inside the Refuge, which has been off limits to cattle for more than fifteen years, the land is rapidly turning to desert. But pastures just outside the Refuge, which have been grazed continuously, remain as healthy as ever. The fear of cattle destroying the range arose from several major episodes of overgrazing that occurred between the end of the Civil War and 1910. 12 How- ever, ranchers learned from these experiences. Today, most use different grazing areas from year to year so that grazed areas have time to recover. Ranchers also take steps to keep their cattle and sheep on the move so that they do not linger in any one area long enough to eat all the grass. Because they have grazing rights on the federal lands, most ranchers realize that it is in their interest not to overgraze. Doing so would only reduce the land's value to them in subsequent years. Also, ranchers who allow their cattle to overgraze risk being fined and their allotment reduced the following year. As a result of the improved management practices ranchers have employed for most of this century, a 1990 BLM report concluded that federal rangelands are in better condition today than at any previous time in this century.
12 For a brief discussion of these episodes, see Public Lands Grazing Fees: A White Paper, published jointly in 1991 by the Public lands Council, the American Farm Bureau Federation, the Association of National Grasslands, the American Sheep Industry Association, and the National Cattlemen's Association, pp. 10-11.9
As they wrestle with the question of grazing fees, members of Congress have five options:
Option #1: Increase all grazing fees. This approach at best would produce only a modest increase in gross grazing fee revenue and would lead to a reduction if --the hike was -large. In addition, it would increase expenses to the federal government and reduce income tax collections. On balance, the goverment probably would lose money by raising fees.
Option #2: Reduce grazing fees. Evidence strongly suggests that even the current fee level is too high. The federal government might actually be better off charging a lower fee if as a result the 20 percent of federal grazing land now idle became grazed.
Option #3: Increase fees only on better quality land and reduce them on poorer land. This would be the fairest and most efficient option as long as the federal government continues to own lands used for grazing. The advantage of this option is that, if the government were able implement it, the fee would be based more accurately on the value of each parcel. The government then would collect more revenue on the few parcels of land for which it currently undercharges, and it also would collect revenue from some of the 20 percent of rangelands that currently produce no revenue because the current fee is too high. Unfortunately, this option may have an Achilles' heel. The administrative cost of initially determining the correct fee for each of the federal government's 318 million acres of rangeland and making periodic revisions could exceed the potential increase in revenues.
Option #4: F"vatize the federal rangelands, subject to existing private rights. This is, in principle, the most attractive option. Privatization of the federal government's extensive land holdings could generate billions of dollars that could then be used for deficit reduction. Alternatively, the government could use the sale proceeds to acquire more environmentally sensitive lands elsewhere, such as wetlands or other critical wildlife habitat, thereby offsetting the current budget cost of land acquisition. Once the rangelands were privately owned, market forces would determine the proper mix of agricultural and recreational uses - and the proper fees - for each parcel of land. Unfortunately, this option is politically impractical at this time.
Option #5: Keep the grazing fees at their current level. Congress simply could renew the current grazing fee schedule based on the formula agreed to in 1978. While imperfect, that formula was the result of a compromise between the government, ranchers, and environmentalists, and is about as good as any formula Congress is likely to come up with. Moreover, the $52.3 million shortfall calculated by the Forest Service and BLM included costs which have nothing to do with administering the grazing program. In fact, it appears that the goverriment makes a slight profit on the program. No case has been made for a hidden subsidy that implies the fees should be raised. Of these options, privatization would be best, but it would not be politically fea- sible at this time. If lands remain in federal hands, it would be best to have the fee vary with the quality and location of the land-provided that the administrative costs of determining the fee for each parcel would not exceed the increased reve- nue. But evidence suggests that -they would be higher. In this case, Congress should either lower the fees or else make permanent the formula that was adopted in 1978. Certainly, fees should not be raised until new studies are available that are free from the fatal flaws that plague the 1986 report and its update.
Ile controversy and confusion over how and at what level to set gazing fees just serves to illustrate the difficulty of setting a fair and market-responsive fee when government owns the land. Ile checkerboard pattem of private and public lands established in the West complicates an already confused legal situation by making it difficult for ranchers to survive without grazing livestock and using water on adjacent goverriment lands. At a time of high fedend spending and deficits, policy makers understandably want to cut a perceived subsidy. But the $52 million above fee receipts spent by the federal government on administering gmzing lands is not really a subsidy to ranchers at all. Most of these administrafive costs would be incunrd even ff no gmzing were permitted, and the seemingly low fees actually reflect the quality of the land and the extra costs incurred by ranchers when they use the fedeml land. Privatization Solution. If the federal government wishes to resolve the dispute over fees, and to raise money to reduce the federal deficit, it should sell the rangelands to private owners. If any of the lands in question are especially sensi- tive or environmentally valuable, appropriate conservation easements could be at- tached. This would ensure that the land is put to its best use and is best cared for without government expense. When dealing with the issue of private uses of federal lands, it is important to remember that the relationship of rancher to the federal land is not that of a renter so much as that of a custodian whose family has cared for the land for genera- tions. 17he federal government always has retained basic ownership, but it has passed on other, more limited forms of ownership to adjacent landowners whose ranching operations require full use of the federal lands. Unless policy makers want to put an end to ranching in the West, grazing fees should not be raised.
William G. IAffer M John Shanahan McKenna Fellow in Regulatory Policy Analyst and Business Affairs